While the market has many headwinds and is expected to remain rangebound in the short term, Sunil Jain, Head of Equity Research - Retail at Nirmal Bang believes the Nifty may continue to move upwards at a rate of around 14 percent to 15 percent CAGR for the next two to three years. In an interview with MintGenie, Jain shared his views on the markets and advised what should retail investors do in this market.
Which way the domestic market may go in the next financial year? What is your overall view?
Overall, in the near term, particularly, in the first half of the year, the market is expected to remain rangebound or in correction mode.
However, post six months, the direction of the market will largely depend on the global and domestic inflation scenario.
If inflation cools off and central banks across the world, including the RBI, manage to bring stability to the economy, the market may start moving up.
It may be a good market for long-term investors, but short-term investors are only losing money. What should they do? Should they stay away from equities?
In the short term, the market is undergoing a correction phase. This means that those who are solely focussed on buying are likely to experience negative earnings in the short term.
Although the correction has been going on since October and it is possible that the market will remain in this phase for some more time.
Investors who engage in short-term trading, such as intraday or trades lasting one week or one month, should hold back for now and remain cautious until the market shows a clear trend of moving upwards.
For the time being, it is advisable to refrain from trading and wait until the market stabilises.
This is particularly important for short-term traders who may be more sensitive to market volatility.
What returns do you expect from nifty over the next two-three years? What are the key challenges?
The outlook for the Nifty index in the next two to three years appears positive, with the potential for compounding at a rate of around 14 percent to 15 percent if we take a long cycle. This would be consistent with past cycles of secular upward movement in the index.
Currently, the valuations of the Nifty are fair or marginally above fair levels, and not very expensive, indicating that there is room for further growth.
However, there are challenges that need to be considered, such as the recent withdrawal of liquidity from the market across the world.
The amount of liquidity infused into the system was massive, and now it is getting pulled out. So, the timing and impact of the withdrawal are uncertain.
If the withdrawal of liquidity continues and global inflation remains high, it could be challenging for the index to maintain its upward momentum.
Despite these challenges, the Indian government is providing good support to the economy, and the country is performing well on other parameters.
Therefore, it is quite possible that the Nifty may continue to move upwards at a rate of around 14 percent to 15 percent CAGR for the next two to three years.
What sectors one should invest in at this juncture to reap the benefits of a rally if that happens? Should one take contra bets?
Despite underperforming the market substantially, the chemical and pharmaceutical sector, specifically API (active pharmaceutical ingredients) companies, maybe a good contra bet due to their reasonable prices and potential long-term outlook.
The problems chemical companies were facing with high inventory and raw material costs are cooling off, and the high energy costs are also decreasing, which could support their cost of production.
So, from a year’s view, chemical companies can be a good contra bet because they are available at very reasonable prices.
Furthermore, the long-term outlook for chemical companies is positive as people are shifting to the 'China Plus One' strategy and making India a larger hub for chemical sourcing.
Another sector that continues to perform well is capital goods, which is expected to continue doing well in the future.
While the banking sector may face some short-term challenges, taking a one-year view suggests they are in good shape and may also do well.
What should investors choose among the banking stocks? Should they stick to large private banks? Do you think PSU banks still have some steam left?
In the banking sector, we have observed a trend where there is a broad-based movement whenever banking stocks move. Typically, large caps tend to lead the way, followed by mid-caps and PSU banks.
One can consider picking up stocks from across the spectrum of the banking sector because mid-cap private banks are available at very attractive prices currently, and investors can consider adding these to their portfolios.
While large-cap banks are relatively safer, they are not available at attractive valuations.
Still, mid-cap or small-cap private banks are also available at less than one-time book value, making them an attractive proposition.
However, it is advisable to stick to large-cap PSU banks like SBI, as smaller PSU banks may come with higher risks.
When do you expect the fed to take a pause and reduce rates?
The Federal Reserve has recently signalled a continuation in interest rate hikes, although it is expected that there may be one or two more increases over the next few meetings, possibly ranging from 0.5 percent to 0.75 percent.
After that, it is anticipated that the Fed will take a break from further rate hikes, as the rate of inflation is likely to remain high, with projections of around 4 percent in the calendar year 2023.
This may lead to a period of stagnation until there are indications that inflation is beginning to decline towards the target of 2 percent.
Only then is it likely that the Federal Reserve will consider reducing interest rates.
What should be the strategy of retail investors at this time?
For retail investors, it is advisable to take a long-term investment perspective in the current market scenario.
Some quality stocks with reasonable valuations can provide good investment opportunities, given the current market conditions.
However, there are still some stocks whose valuations remain higher than the pre-COVID level, and these may not be the best investment choices at present.
Instead, investors should focus on stocks with valuations that have come down to pre-COVID or lower levels, as these stocks may offer reasonable returns over the next two to three years.
By selecting quality stocks with favourable valuations, investors can position themselves for potential growth while also managing risk.
Disclaimer: The views and recommendations given in this interview are those of the expert. These do not represent the views of MintGenie.